Post-Covid Profit Growth Outpaces Investment in India
MUMBAI: Corporate profits in India have surged significantly post-pandemic, outpacing investment growth. According to a working paper from the Economic Advisory Council to the Prime Minister, profit before interest and tax (PBIT) rose by 21.4% in FY24, while gross fixed assets (GFA) grew by only 6.1%. The study indicates that while profitability has improved, the recovery in corporate investment remains sluggish.
Profitability Trends
The analysis reveals a notable increase in median return on assets (ROA), which climbed from 4.4% in FY21 to 7.2% in FY24. This suggests that companies are generating more revenue from their existing assets. However, the paper points out that strong profitability does not necessarily translate into new investments. The initial returns from fresh fixed-asset investments have weakened, leading to lower marginal profitability. Companies may be hesitant to invest in new plants if they anticipate lower returns compared to their current operations.
The study also highlights external factors affecting investment decisions. Global economic uncertainty, trade imbalances, and rapid technological changes could be contributing to companies’ reluctance to invest. Despite these challenges, the paper found no significant evidence linking market concentration or financial constraints to the disparity between profitability and investment levels.
Investment Recovery Patterns
Investment recovery varies by ownership type. Foreign-owned firms have seen a decline in investment intensity since the peak in FY20, while Indian private firms experienced a plateau after an initial rebound. Companies within Indian business groups showed a more consistent recovery. The paper attributes the investment peak in FY20 to unusually high investment intensity among a few large, asset-rich companies, a trend that has not returned by FY24.
The analysis utilized CMIE Prowess financial data from 48,896 companies, including both listed and unlisted firms. The paper recommends enhancing production-linked incentive schemes and increasing public infrastructure investments to stimulate private investment. It also calls for stronger support for innovative firms and improved links between industry and academia.
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